Global banks, climate risk, and credit allocation

Abstract

This study assesses banks’ international credit allocation decisions responding to severe climate events in their home country or abroad. Using a panel dataset of syndicated loans originated to European firms between 1985 to 2024, I found a significant decrease in loan amount by crossborder lenders when flood risk increases in the borrower’s country, but an increase in loan amount by cross­border lenders when flood risk increases in the lender’s country, in line with the credit reallocation argument. The effect is robust to accounting for borrower characteristics, regional macro­economic conditions, factors that are specific to time­invariant borrower and lender characteristics, and a variety of robustness concerns. The negative effect of flood risk in borrower’s country on cross­border loans is alleviated by cultural and geographic proximity between the borrower and the lender’s countries. Nevertheless, when the lender’s country is remote from the borrower’s country, both in terms of language and geographical distance, increased flood risk in lender’s country leads to a shift respective to cross­border loans. Finally, this study contributes to the recent literature on climate risk mitigation, by compounding insurance and banking sector.

Date of Award	29 Jan 2025
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Sujiao Zhao (Supervisor)